Marcello Schermer is the regional manager for Africa for Seedstars World– a company that promotes, connects and invests up to $1.5mn in emerging market startups through its exclusive startup competition in 60 countries. Marcello facilitated pitch practice sessions with ALU students as their geared up for the finale of the Student Ventures Programme. During his brief visit to our Mauritian campus, ALC, Marcello gave a talk on Funding African Ventures: Impacting People’s Lives in Emerging Markets.
Trends in the Startup and Investment World
Over the last few years Africa has gone from “no tech” to “high tech” with small startups using technology to solve niche problems. Marcello sighted Asoriba as an example, a tech company in Ghana that launched an online platform for churches to interact with their members and the community. Asoriba and many others mark the rise in technology as an instrumental tool in Africa’s reform. Different regions across the continent have become “hubs,” specialising in a few industries. What this means is that all across Africa are hotspots blossoming with investment opportunities. South Africa, Nigeria, Kenya, Ghana, Egypt and Tanzania are among the top six countries currently receiving the bulk of these investments. African tech hubs raised $185,785,000 in 2015 alone. Other thriving industries include Fintech (finance technology), e-commerce, solar energy and healthcare.
More investment in Africa sounds great, doesn’t it? The downside, however, is that these investments are concentrated to specific countries. Smaller countries with young innovative entrepreneurs are missing out on investment because their localised market is too small. Regulatory problems across the continent prevent startups from expanding and scaling. This is why the Africa Passport is an important step in improving cross-continental collaboration needed to take Africa to the next level. According to Marcello, “the number of entrepreneurs is growing faster than the number of investments or businesses coming up” creating a loop that drives people to these hubs to seek funding for their ventures, eventually saturating the market.
The Future of Fundraising and Technology in Africa
Africa needs to shy away from aiming to become the next Silicon Valley. Silicon Valley was built over a period of 70 years and is a unique market in itself- one that cannot and should not be compared to Africa’s unique markets. Silicon Valley cannot achieve the same milestones that Africa has because they have never been faced with our challenges. M-pesa, a phone-based money transfer, financing and microfinancing service in East Africa is a great example. Most companies in Africa emerge mobile first because most countries in Africa are above 80% mobile penetration. M-pesa is one of many solutions to unique problems in Africa.
Marcello urges Africa to build its market based on our strengths. Whether African countries become the next drone hub or health hub, the continent can move forward with original ideas that tackle its own challenges, rather than superimposing existing solutions meant for different problems.
Where does the Money come from?
There is overwhelming evidence that Africa’s middle class is growing, and so is their disposable income- not just for luxuries, but for investment. In present day, the bulk of startup funding comes from external and foreign investors that are eager to secure their spot in Africa’s rising future.
“There’s no lack of rich people on the continent but there’s no stable middle class”
There is huge potential for local investment. Unlike foreign investors, local investors bring their localised expertise for doing business on the continent, knowledge of markets and networks- all crucial to any startup. An investor is more than an ample bank account. Investors are partners that are in it for the long haul and equally invested in the success of your business. Startups must take time to think about the kind of people and organisations that are compatible with the values and long-term goals of their business.
Entrepreneurs have reduce room for negotiation when there are few foreign investors. They end up giving away a lot more of their business for a lot less. The question remains, how can young entrepreneurs in Africa actually raise funds?
The Art of Fundraising
According to Marcello, “startups do not exist to raise money, but to make money.” An investor is willing to invest when a startup can prove its financial viability. To guide any young entrepreneur, Marcello shared some tips on how to know when to fundraise.
Ask for funding if you…
- already have a product, no one is going to fund ideas
- can show that you have a team that shows you have various skill sets covered
- have a market- prove you can replicate the market with more money
- have an advantage- what sets you apart that cannot be replicated?
Don’t ask for funding if you…
- only have is an idea
- don’t know how to build the product
- don’t have a team
Bootstrapping
Not every venture needs to raise millions from bank loans or investors to launch a venture. Bootstrapping is a strategy that many startups employ to self-fund their businesses. It is a combination of raising and saving money. Strategies to raise money include part-time or freelance work while saving techniques include working from home or trading services. Bootstrapping allows an entrepreneur the space to get creative about how to earn and save money.
Is there a downside to all this funding? Yes! Fundraising in itself is a full time job and requires time and energy away from the business. The most important element of fundraising is striking the balance between assessing financial opportunities and growing your business. Excessive funding can potentially result in neglect of the business and not enough fundraising means lack of capital to scale.
For more information about how ALU is developing young and ethical entrepreneurs for Africa, visit our Entrepreneurship Leadership course.